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How communication tax may slow broadband service adoption, impede economic growth

Despite the desperate calls to the Federal Government of Nigeria to end multiple taxation on the heavily taxed telecommunications sector, stakeholders are further taken aback by the nine percent communications service tax (CST) that was previously suspended by the 8th National Assembly which has re-emerged, and is being considered to be passed into law.

The Communication Service Tax (CST) Bill 2015, if passed, will require consumers of voice, data, short message service (SMS), multimedia message services (MMS) and pay TV services, to pay a nine percent tax on the fees paid for the use of these services. The tax will be collected in addition to the 5 percent Value Added Tax (VAT) that consumers already pay when they purchase devices and communication services, as well as the 12 percent custom import duties paid on ICT devices, and the 20 percent tax levied on SIM cards.

Industry players say the impact of the adoption of nine percent CST bill is a double tax on voice, sms and data services, as five percent VAT already applies on these services.

The GSMA recently raised serious concerns about a proposal to introduce a nine percent Communication Service Tax in Nigeria. Following substantial research into the impact of taxation on mobile communication services, the GSMA believes such a tax poses a severe threat to Nigeria’s future economic growth.

They say imposing a new ‘sector-specific’ tax on communication services would result in increasing price levels for consumers, and as a result, decrease the adoption and usage of broadband services. This will in turn have adverse effects on the industry investment needed to improve and expand mobile connectivity across the country. The proposal departs from best-practice principles of taxation recommended by the International Monetary Fund and the World Bank. These institutions recommend that taxation should be as broad-based as possible (i.e., not sector-specific) and should not undermine investment.

“The government’s long-term digital ambitions will be severely compromised if these tax proposals go ahead,” said Akinwale Goodluck, head of Sub-Saharan Africa, GSMA. “The potential of mobile broadband is clear from the rapid development of the digital economy in Nigeria. The mobile ecosystem already contributes over US$21 billion to the Nigerian economy and around 16 per cent of total government tax revenue. The focus should be on boosting mobile penetration, and investment in networks to strengthen the economy, rather than undermining this through potentially punitive taxes.”

Economic impact of mobile services is at risk

According to the International Telecommunications Union (ITU), a 10 per cent increase in mobile penetration in a sample of African countries yields a 2.5 percent increase in GDP per capita. To support sustainable economic growth, fiscal policy in Nigeria should promote the wider adoption of broadband services and not hamper their adoption. Such taxes could also end up having a disproportionate impact on poorer households.

Affordability is a barrier to adoption

Nigeria recently surpassed 100 million subscribers1. Despite this fact, around half of the population remains unconnected. About one-third of the population in Nigeria use a mobile internet service, and the same proportion have a smartphone. Based on this, Nigeria currently lags its regional peers in terms of mobile broadband adoption. Increasing adoption is crucial in a country where fixed-line penetration is at less than one percent.

Among the unconnected, affordability is cited as the main barrier stopping them from getting a connection. Based on GSMA analysis of the total cost of mobile ownership, a 1GB basket in Nigeria costs around seven percent of average income in 2018. This is significantly above the United Nations Broadband Commission’s affordability target of 1GB of mobile broadband data available for two per cent or less of gross national income per capita. The affordability barrier is particularly evident for lower income citizens in Nigeria for whom access to a 1GB basket would cost around 24 percent of income. The new tax, even if only partly reflected in prices, will exacerbate an already significant affordability barrier and hamper the uptake and usage of services, especially for lower income citizens.

“To support its digital agenda, the government should take steps to remove any barriers to affordability, increasing mobile penetration, and investment in Nigeria’s digital infrastructure. This will, over time, lead to much faster economic growth together with higher fiscal income for the government from a broader tax base,” Akinwale Goodluck said.

According to Olusola Teniola, president, Association of Telecommunications Companies of Nigeria (ATCON), the adoption of CST represents an additional burden when applied to a subscriber base of 173 million.

“If the passage of this bill goes through it would negatively impact Nigerians and foreigners that use these services. The implementation of this CST bill would take the affordability of data services out of the reach of the citizenry,” Olusola told BusinessDay.

Jumoke Akiyode-Lawanson

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